Is This 7% Yielding REIT Worth Buying?

Simon Property Group (NYSE: SPG). Shares of the company have fallen significantly since the start of the year, pushing the stock’s dividend yield to 7%. With the dividend looking relatively well covered and the stock valuation looking pretty cheap, in my opinion, I’m bullish on the stock.

With the market becoming more unpredictable by the day due to today’s highly speculative macroeconomic and geopolitical landscapes, large dividend yields can reduce uncertainty and increase the overall predictability of a stock’s investment case.

SPG is a high quality REIT

Investors are generally skeptical of retail REITs, and for good reason. With foot traffic at retail stores remaining rather low despite the pandemic subsiding and their growth prospects lacking significant catalysts, it makes sense that retail REITs aren’t particularly popular these days. However, Simon Property Group has multiple qualities that differentiate it from its peers.

First, with a market capitalization of approximately $32.6 billion, Simon is the second most valuable retail REIT in the United States, just behind Realty Income (NYSE: O). As a result, Simon’s operations are exceptionally diverse.

Specifically, Simon owned or had an interest in 198 income-producing properties, according to his latest filings. They included 69 Premium Outlets, 94 malls, 14 Mills, six lifestyle centers and 15 other commercial properties located in 37 states and Puerto Rico. Simon also has an 80% non-controlling stake in the formerly publicly traded Taubman Realty Group, which he bought out in 2020.

In addition, the company’s international exposure strengthens its geographic diversification, with Simon holding a 22.4% stake in Klépierre SA (PARIS: KLPEF), a listed French real estate investment trust which, in turn, owns a stake in shopping centers located in 14 European countries.

Additionally, Simon’s aspiration is for his properties to be the destination of choice for high-end retailers and their customers. This means the business attracts high quality tenants that cater to the high end consumer, which has increased its buying power.

Therefore, Simon is not bothered by lower quality retailers whose finances can be easily affected during a market downturn and which, in turn, would lead to lower rent collections. This is evident by the fact that Simon is currently offering a base minimum rent of $54.1 per square foot, on average, which is incredibly high for retail space.

Another rock-solid neighborhood for Simon Property Group

Although Simon is one of the highest quality retail REITs, the business has been hit particularly hard during the pandemic. However, its recovery momentum was strong last year and the company has continued to improve since, as seen in its latest second quarter results.

Simon’s total revenue reached $1.28 billion, an increase of 2.4% over last year. The improvement in turnover was mainly supported by strong rental dynamics and still high occupancy rates. Thus, the FFO per share also rose, albeit by a modest 1.4% to $2.96.

The NOI of Simon’s portfolio, which includes domestic properties, international properties and Simon’s stake in Taubman Realty Group, increased by 4.6% compared to the second quarter of 2021. This indicates that the oversized takeover of Taubman by the company continues to be accretive to Simon’s overall performance. In addition, the occupancy rate improved further, reaching 93.8% compared to 91.8% last year or 93.8% in the last quarter. That’s pretty impressive considering the hurdles of the current economic environment.

With management growing increasingly optimistic amid a better-than-expected first half to fiscal 2022, it raised its outlook for the prior full year, now expecting FFO/share to rise. is between $11.70 and $11.77, down from $11.60 to $11.75 previously.

This range is fairly close to the company’s pre-pandemic FFO/share number of $12.37 for fiscal year 2019, indicating a near-full recovery in a very short time. This is attributed to Simon’s apt qualities, in my opinion, and specifically the company’s focus on high quality tenants.

SPG Stock’s 7% dividend yield is reliable

While Simon has cautiously cut his dividend during the pandemic, I think SPG’s current 7% dividend is reliable. This is supported by the fact that alongside its second quarter results, the company increased its dividend for a sixth consecutive quarter at a quarterly rate of $1.75, marking a sequential increase of 6.1%, or an increase of 16.6% year over year.

Additionally, the current annual dividend rate of $7.00 and the midpoint of management’s guidance imply a comfortable payout ratio of 60%. Given the sequential increases and the possibility of further increases, the quarterly dividend should reach and even exceed its pre-pandemic levels sooner rather than later.

Is SPG stock a good buy?

As for Wall Street sentiment on Simon Property Group, the stock has a Moderate Buy consensus rating based on five buys and eight holds assigned over the past three months. At $121.85, the average SPG price target implies 22.6% upside potential.

Takeaway – SPG stock has a wide margin of safety

Simon’s quality features are useful in today’s uncertain economic environment. Additionally, based on the midpoint of management’s forecast, the shares are trading at a P/FFO of around 8.5 at their current price levels, which, combined with the relatively well-hedged dividend yield of 7 %, should provide investors with a wide margin of safety.

The current market configuration could continue to put pressure on Simon’s shares. However, assuming the stock’s valuation returns to its historical average of one P/FFO in the 1930s, combined with current dividend yield and FFO/share assumptions in the low single digits, investors could easily envision double-digit annualized growth. medium term. As a result, I am bullish on the stock.

Disclosure

About Catherine Wilson

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